We use cookies to customise content for your subscription and for analytics.If you continue to browse Lexology, we will assume that you are happy to receive all our cookies. For further information please read our Cookie Policy.

Simple steps to effective risk management

Are there simple steps that service providers can implement into their day-to-day processes that can help them effectively manage risk?

The Solution

Three simple steps can help service providers manage risk. Those steps are (1) assume there is a reason for every contact from the client, and look to provide solutions even when not asked to do so; (2) document your conversations and the course of action you decide upon, even if the decision is to take no action, and; (3) don’t overstate your role.

Analysis

Assume there is a reason for every contact from the client – but do not assume it is the reason the client mentioned

Assume that a financial adviser recommends that his client invest her assets in a portfolio made up largely of aggressive growth stocks. The client loses her high paying job, and calls the adviser to let him know about this change in her status. She later tells the adviser that she may have to take a loan from her 401(k) account in order to meet current expenses. Meanwhile, the stock portfolio suffers losses due to a downturn in the market. In the client’s mind, the adviser should have suggested reducing the portfolio’s exposure to aggressive growth stocks when he learned that the client had lost her job. In the adviser’s mind, the aggressive growth portfolio was not intended to be tapped into to meet short term obligations, but instead, was intended as a long-term vehicle to supplement her retirement.

Even if the client didn’t expressly ask for advice or say that she wanted action to be taken regarding her stock portfolio, the adviser would have been less vulnerable to a claim if he had assumed that everything – including the stock portfolio – was in play in light of this change in the client’s circumstances.

Document conversations and decisions you make with your clients – even if the decision is to take no action

In the example above, the client and adviser could decide on any one of several approaches – do nothing, "watch and wait" and reevaluate the client’s position after a few weeks or months, make a change to the portfolio, or do nothing at all. Even "doing nothing" is, however, doing "something." From a risk management standpoint, what really matters is that the adviser and the client discussed it and agreed upon a course of action, even if that course of action was to take no action. Ideally, the adviser would document his file and describe what they decided to do and why. Better yet, the adviser would send a short letter or e-mail to the client confirming what they discussed, and stating that because the client’s stock portfolio was intended to supplement the client’s retirement, they mutually decided to make no changes to the portfolio at that time. Doing so would reduce the likelihood that the client would bring a claim against the adviser.

Only be the captain of your own ship

Service providers sometimes take a somewhat paternalistic approach to their clients, and to try to do all of the thinking for them, to relieve them of inconvenience. That can lead to trouble. In one case we handled, a third party administrator that acted as an employee stock ownership plan ("ESOP") promoter or facilitator sent an e-mail stating that he was the "captain of the ship" in connection with an ESOP transaction. In another, a third party administrator stated that his client would "sign anything I tell him to sign," which implied that the TPA, and not the client, was in charge of the plan’s investments.

Each of these service providers unwittingly took on responsibility for something beyond the services they were actually hired to provide. Those who know their role, stick to that role, and insist that the client make all the final decisions (even when the client likes the "convenience" of someone else making decisions for them) are less likely to be sued, than those who see themselves as "the captain of the ship."